Most people who inherit a super pension from a spouse focus firstly on whether or not the pension was reversionary (ie, did it continue to the surviving spouse automatically). But there are actually some other options to think about too.
It’s easiest to explain all these with a real example – so let’s assume Alex has a super pension ($2m) and an accumulation account ($0.3m). He’s just died and Jane (his spouse) is in control of what happens to his super.
There's one thing that’s true no matter what : she must “do something” with all of it. Every dollar must be either used to provide a pension to her (assuming there are no other potential candidates) or paid out as a lump sum to Jane, Alex’s estate or their adult children.
If Alex’s pension was reversionary to Jane, it will continue to her automatically. If he died on (say) 1 January 2024 before taking any pension payments for the year, she will need to make sure she takes the full year’s minimum before 30 June 2024. The amount will be whatever was calculated for Alex - ie, it's based on his age and pension balance at 1 July 2023 even if Jane inherits it before any pensions are paid.
And come what may, the value of the pension on the date of Alex’s death ($2m) will be checked against her transfer balance cap 12 months later (1 January 2025).
But she doesn’t have to keep this amount in pension phase.
What if Alex’s pension balance is mostly a “taxable” component while his accumulation account came from a downsizer contribution made just recently (so it’s 100% tax free component)?
If Jane is looking ahead, she’ll be thinking about what happens when she dies. At that time, the money will go to her adult children. They will pay tax on any taxable component. So in many ways, she’d rather leave the accumulation account in super because it is currently 100% tax free component.
Let’s start with a simple case and assume Jane doesn’t have any pensions in place herself.
There would be nothing to stop Jane:
(Let’s say these two things happen a month later on 1 February 2024.)
Twelve months on when the reversionary pension is added to Jane’s transfer balance account, it will look like this:
|
1 February 2024 (new death benefit pension) |
$300,000 |
|
1 February 2024 (partial commutation) |
($400,000) |
|
1 January 2025 (reversionary pension) |
$2,000,000 |
|
Total |
$1,900,000 |
The end result for Jane is that she’s within her transfer balance cap and has two pensions from Alex’s super:
The remaining $400,000 has been paid out to her.
Importantly, even though she inherited a pension, she didn't need to leave it in place. She had choices.
Even if Jane had pensions of her own, the same would apply. She would, of course, need to switch off her own pensions to create enough “cap space” to leave any of Alex’s money in super. But she would have choices.
If Alex’s pension was non reversionary, she actually has even more flexibility.
In the earlier example, Jane had to take a partial commutation from Alex’s pension to ensure she didn’t breach her transfer balance cap.
But if the pension had been non reversionary she would simply:
Importantly – once again – Jane could re-organise Alex’s accounts so that she left the balance she wanted in super. She's not restricted to taking the original pension account as a pension.
We’ll explore these strategies and much more in the Super Companion – want to find out how to subscribe? Select 'Learn more' below.